Acacia Communications (ACIA) provides high-speed coherent interconnect products in the Americas, Europe, the Middle East, Africa, and the Asia Pacific region. The company’s mission is to deliver high-speed coherent optical interconnect products that transform communications networks, relied upon by cloud infrastructure operators and content and communication service providers, through improvements in performance and capacity and a reduction in associated costs. Acacia was founded in 2009, is based in Maynard, Massachusetts and employs 211 employees. The stock is Zacks Rank #1 (Strong Buy) and todays Bull of the Day.
Acacia has a market cap of $3.2 billion with a Forward PE of 41. The stock sports Zacks Style Scores of “A” in Momentum, but “D” in both Value and Growth. The company sits in an industry that is ranked 107 out of 265 (Top 40%) in the Zacks Industry Rank.
Recent IPO and Stock Run
Acacia priced at $23 back in May and traded in the $30-40 area, until it broke out in early July. From there it ran all the way to $128.73 before recently pulling back. Undoubtedly, a pullback was warranted in one of the hottest stocks of the year after 200% plus move. So when you add a secondary offering, you bet that investors will get nervous and short sellers will pounce on the stock.
Offering and Lock up
The company elected to do a secondary in which it offered 4.5 million shares at $100 a share. Acacia intends to use proceeds for working capital and general corporate purposes. So basically, the company was taking advantage of the stocks run up and raised some cash.
In addition to the offering, the lockup period expires on November 9th. This is when investors can finally sell their shares they have been holding since the IPO. Because of this, some short sellers will speculate that the price will go down as shareholders put pressure on the stock. This speculation will make for some wild volatility in the stock and investors will be sure to see massive price swings.
But there is reason to believe that the short sellers might be overly aggressive as the stock trades under its offering price of $100. The company has issued impressive guidance twice in the last month. In addition, analysts are taking their estimates aggressively higher, something a short seller will lose sleep over.
Raising guidance for Q3
Q2 earnings back in August were the catalyst for the move over $100 a share. The company beat by 47 cents on EPS, or 230%. The stock responded by shooting up 70% in just six trading days, going from $70 to $120.
On September 26th, the company offered a guidance range of $0.72-$0.81 verse the $0.72 expected. This is when the offering was announced, so the stock slid about 10%.
On October 4th, the company once again issued a higher guidance range of $0.83-$90 for Q3, well above the previously mentioned range. The stock then shot up 10% on that news.
The short term volatility caused by news is driving traders crazy, but long-term investors should be looking to the estimates.
For fiscal year 2016, estimates have been revised 76% higher over the last 90 days, from $1.22 to 2.15. For 2017, we have seen a 11% jump over the same time frame, from $2.15 to $2.40. It is obvious that the company is seeing the possibility of earnings accelerating this year and into the next. Short sellers should be on edge.
When a secondary hits, or when a lockup approaches, the sharks will be in the water. Shorts will pile in the stock smartly knowing that sellers in the future will drive down price. But as we mentioned above, Acacia earnings estimates revisions might fuel another run in it higher. If this is the case, the stock could easily be taken back up to recent highs, as shorts scramble to cover their borrowed shares.
According to Shortsqueeze.com there are currently 2.7 million shares short, 28% of the float. This is a big number that has recently grown because of the offering. Any positive news could cause Acaia to squeeze back over $100.
Acacia is volatile and one of the hottest stocks of 2016. There is a lot of negative sentiment over the recent offering and the upcoming lockup expiration, but investors might want to take a closer look at EPS. This stock could be at the early stages of one of the next great momentum stocks of 2017.
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